How Powerful CFOs Camouflage and Exploit Equity-Based Incentive Compensation

Collins, Denton; Fleischman, Gary M.; Kaden, Stacey; Sánchez, Juan M.

doi:10.1007/s10551-016-3427-9

Cited by 17 publications

(20 citation statements)

References 73 publications

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“…While the idea of performance-sensitive option grants is an intuitive way to discourage self-serving behavior, Abernethy et al (2015) find that CEOs set low-performance targets to increase the likelihood of their stock options' vesting. These and other forms of camouflaging mechanisms, such as ex post rigging of performance measures (see Morse et al (2011)), and more recently contracting for lower pay duration (see Collins et al (2018)), continue to be challenging to detect.…”

Section: Ceo Compensation and The Camouflage Motivementioning

confidence: 99%

“…Bebchuk, Cohen, and Hirst (2017) argue that, under weak governance, powerful CEOs tend to award themselves excessive compensation and camouflage it to avoid public outcry (i.e., outrage costs). The literature on mechanisms to hide CEO pay mentions the use of supplemental executive retirement plans and deferred compensation (see Bebchuk and Fried (2004)), choice of performance measures in performance vested stock options (see Abernethy, Kuang, and Qin (2015)), lower pay duration (see Collins, Fleischman, Kaden, and Sanchez (2018)), and ex post rigging of performance metrics (see Morse, Nanda, and Seru (2011)). Our finding that focal firms influence ISS to include firms with highly paid peers is yet another mechanism to camouflage excessive CEO pay.…”

Section: Introductionmentioning

confidence: 99%

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Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

Iyer¹,

Palmon

Sankaran³

2022

J. Financ. Quant. Anal.

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We document that firms that expect their CEOs’ compensation to exceed the median CEO compensation of their Institutional Shareholder Services (ISS) peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms’ chosen peers. This turnover results in increases in the medians of the ISS peers’ CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.

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Section: Ceo Compensation and The Camouflage Motivementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

Iyer¹,

Palmon

Sankaran³

2022

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

show abstract

“…Research about publicly traded firms indicates that some forms of compensation are more readily observed, such as cash bonuses and salaries, as compared with more opaque forms of compensation, such as incentive equity compensation in the form of options, grants, and restricted stock (Bebchuk and Fried, 2003;Bebchuk et al, 2002;Dechow, 2006;Abernethy et al, 2015;Collins et al, 2018). Because of the noteworthy observational difficulty differences of cash versus noncash equity compensation, Bebchuk and Fried (2003) proposed managerial power theory, that posits that CEOs, CFOs and other powerful executives can use their relative power to manipulate their own compensation.…”

Section: Influence Of Ceo Cash Versus Noncash Compensation -H3mentioning

confidence: 99%

The impact of relative CEO compensation on not-for-profit contributions

Kaden

Peters

Sánchez

et al. 2021

JPBAFM

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PurposeThe authors extend research suggesting that external funders reduce their contributions to not-for-profit (NFP) organizations in response to media-reported CEO compensation levels.Design/methodology/approachEmploying a maximum archival sample of 44,807 observations from US Form 990s, the authors comprehensively assess the extent that high relative NFP CEO compensation is associated with decreases in future contributions.FindingsThe authors find that donors and grantors react negatively to high relative CEO compensation but do not react adversely to high absolute executive compensation. Contributors seem to take issue with CEO compensation when they perceive it absorbs a relatively large portion of the organizations’ total expenses, which may hinder the NFP’s mission. Additional findings suggest that excess cash held by the NFP significantly exacerbates the negative baseline relationship between future contributions and high relative CEO compensation. Finally, both individual donors and professional grantors are sensitive to cash NFP CEO compensation levels, but grantors are more sensitive to CEO noncash compensation.Research limitations/implicationsThe authors’ data are focused on larger NFP organizations, so this limits the generalizability of the study. Furthermore, survivorship bias potentially influences their time-series investigations because a current year large-scale decrease in funding due to high relative CEO compensation may cause some NFP firms to drop out of the sample the following year due to significant funding reductions.Originality/valueThe study makes three noteworthy contributions to the literature. First, the study documents that the negative association between high relative CEO compensation levels and future donor and grantor contributions is much more widespread than previous literature suggested. Second, the authors document that high relative CEO compensation levels that trigger reductions in future contributions are significantly exacerbated by excess cash held by the NFP. Finally, the authors find that more sophisticated grantors are more sensitive to noncash CEO compensation levels as compared with donors.

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“…Their results generally supports the theory of friendly board. However, Collins et al (2018), guided by managerial power theory and the theory of power and self-focus, find that firms with powerful CFOs with short pay durations tend to experience lower level of earnings quality. To date, there is no Australian evidence on the effect of CFO board membership on firm outcomes.…”

Section: Cfo Board Membershipmentioning

confidence: 99%

Getting CFO on board – its impact on firm performance and earnings quality

Duong

Evans

Truong

2020

ARJ

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Purpose This paper aims to investigate the impact of Australian Chief Financial Officers (CFOs) as board insiders on firm performance and earnings quality with reference to agency theory and theory of friendly board. Design/methodology/approach The ordinary least square, two-stage least-squares and propensity score matching regressions are performed with various proxies for firm performance and accruals quality. Findings Firms with CFOs as board insiders experience significantly lower firm performance and earnings quality. In firms with powerful CEOs, the negative impact of CFO board membership on earnings quality is further magnified. Additionally, the negative impact of CFO board membership on firm values and earnings quality is only present in firms with bigger boards or firms with less outside directors. The findings are consistent with the agency perspective and in sharp contrast to the US market. Originality/value This is the first Australian study to examine the impact of CFO board membership on firm performance and earnings quality. The findings suggest that the monitoring of executives is best done by a small or independent board and that the insider board membership should be optimised.

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How Powerful CFOs Camouflage and Exploit Equity-Based Incentive Compensation

Cited by 17 publications

References 73 publications

Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

Shoot the Arrow, Then Paint the Target: CEO Compensation and Institutional Shareholder Services Benchmarking

The impact of relative CEO compensation on not-for-profit contributions

Getting CFO on board – its impact on firm performance and earnings quality

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